“There’s definitely a new tone and new attitude at the top,” said Geoff Manville, principal at Mercer. As Phyllis Borzi, the new assistant secretary of labor, has said, there’s a new sheriff in town (see “EBSA Sets Out Carrot, Stick Agenda”).
Conflicted advice is one area regulators are examining. Roberta Ufford, principal at Groom Law Group, said the Department of Labor (DoL) is working with the Securities and Exchange Commission (SEC) to take enforcement action against undisclosed conflicts of interest by advisers. Ufford noted that Borzi is interested not only in finding advisers with conflicted compensation, but also for advisers with incentive to provide “conflicted” advice.
Ufford noted that the DoL can be motivated by what’s in the news, similar to what has happened with regulatory actions against Ponzi schemers in response to the unearthing of Bernard Madoff’s fraud.
Preventing Fee Litigation
Fee disclosure also continues to be the big issue on the table. The long-awaited fee disclosure rules might come to fruition in 2010 (“Fees Are the Word”). Marcia Wagner, president of The Wagner Law Group, noted that Borzi expects the final 408(b)(2) regulations, dealing with service-provider fee disclosure, to be published in the next couple of months. After the 408(b)(2) regulations are published, Borzi expects the final regulations for disclosure to participants to be published.
Wagner also noted the lawsuits surrounding 401(k) fees. Despite what is reported in the press, Wagner said the lawsuits are actually pro-plaintiff, because many, if not most, are going to trial. She outlined the following best practices to strengthen defense against fee litigation:
- identify fees
- compare investment management fees or expense ratios against benchmarks
- continually monitor
- document reviews of investment vehicles and fees
- hire independent third-party investment experts.
- conduct a fiduciary audit.
- use a fiduciary manual.
The need for more third-party experts is good news for advisers. Wagner predicts that more plan sponsors will use consultants to assist with reviewing the investment performance and fees of investment managers and related service providers.
Other areas the DoL is interested in that could affect advisers are target-date funds and financial literacy. The financial crisis has put the spotlight on the need for basic financial education, and Wagner said the DoL has acknowledged this need, which could put the burden on plan sponsors and therefore advisers. “One on one education works best … The question is, will this be mandated?” she said.
Target-date funds have also come under scrutiny because of the high equity exposure many of the 2010 funds held, which resulted in significant losses by some close to retirement. Plan sponsors and their advisers can expect more regulation in that area. “I think the Wild West days of target-date funds are over,” Wagner said.